The Central Bank of Nigeria has introduced strict new controls that affect how importers and distributors can access fx they need to pay for goods brought into the country. If they continue, the new controls will add cost to the value chain and severely impact how many distributors bring products into the Nigeria.
The official Central Bank of Nigeria notice says:
“As part of continued efforts by the Central Bank of Nigeria to ensure prudent use of our foreign exchange resources and eliminate incidences of over-invoicing, transfer pricing, double handling charges, and avoidable costs that are ultimately passed to the average Nigerian consumers, Authorised Dealers are hereby directed to desist from opening of Forms M whose payment are routed through a buying company/agent or any other third-parties.”
Form M is mandatory documentation process put in place by the Federal Government of Nigeria to monitor goods that are imported into the country as well as enable collection of import duties. In practice, it is what allows an importer to go to their bank with a supplier invoice and request the fx needed to pay for goods.
The new regulations mean that goods acquired through third parties (rather than the original manufacturers) such as agents or wholesalers outside Nigeria cannot be paid for using fx acquired via the Central Bank of Nigeria. In practice, this means that goods will either have to be paid for without access to funds held in Nigeria OR they will have to be paid for using fx acquired on the black market.
Many brand owners and manufacturers use bona fide service providers when outsourcing, which is driven by different commercial reasons, such as lack of internal resources and knowledge.
This measure has been prompted by the practice of overinvoicing. Overinvoicing is where the cost of goods is artificially inflated. In having to pay more for the goods, the importer has to ask for more fx from the Central Bank. The risk for the Central Bank (CBN) at a time when the price of oil is low, is that it draws on limited reserves of fx.
Companies overinvoice as a way of getting money out of Nigeria. One reason it happens is because while the Central Bank rate for the US dollar is 380 Naira, the black market rate is around 480 Naira, 26% higher. In other words, by using the Central Bank to facilitate the transaction, someone holding Naira can get a dollar rate that gives them 26% more dollars.
The second restriction is a new price verification system:
“the CBN will be immediately introducing a Product Price Verification Mechanism to forestall over-pricing and/or mispricing of goods and services imported into the country.”
Price verification systems have been used before in Nigeria. Run by companies such as Cotecna and SGS, they are expensive and cumbersome to manage. In order to get a Form M, importers must submit their invoices for pricing checks, which are compared against benchmarks held by the verification companies. The cost of this process is effectively added into the value chain and onto the final cost to the consumer for the products they buy.
For importers the price verification system is a pain but not insurmountable. It means more back-and-forth about prices and may lead to delays. The ban on imports via third parties will hit the many distributors who prefer to channel their imports to Nigeria via, for example, Dubai. Many suppliers prefer this too – legal systems may be more transparent, payment easier etc.
What does it mean?
A price verification system will mean additional cost in the value chain, possible delays and debates with verification agencies about the “true” price of goods. Goods sold to an importer at a discount (potential underinvoicing – which is sometimes used to lower duties) or at a higher cost for some reason will be subject to scrutiny.
If the Central Bank of Nigeria does insist that imported goods paid for using the current Form M mechanism it will mean havoc for distributors and brand owners alike. Many, if not all of the major distributors in Nigeria of well known brand names route purchases via subsidiaries and third parties. Any importer who does not buy direct from the manufacturer, which includes all the supermarket owners that put bulk orders into European or Middle Eastern based wholesalers, cannot continue this practice unless they pay for their goods another way.
There is also a significant issue where brand owners and manufacturers have given a power of attorney to a 3rd party to register their products with NAFDAC, which in turn can, in some cases, mean that company already has the legal right to act on behalf of the brand owner/manufacturer.
The import restrictions may be unworkable, as it was when the CBN banned access to fx for dairy goods and had to u-turn to allow the major dairy companies to import.
The subtext also is that the Nigerian government knows that continued low prices for oil mean that access to fx via the central bank will be harder for years to come. It is trying to make imports more difficult, such as banning the import of maize in July, to “stimulate” domestic production, processing and manufacturing. But import restrictions and bans are very blunt tool and absent a coherent program to provide meaningful stimulus to local production, rarely work.